Office of Fair Trading says savers missing out on billions of pounds in pensions rip-off

Britons are losing billions of pounds in a pensions rip-off, regulators
revealed, as the OFT called for a ban on unfair charges and an unprecedented
audit of the industry to force down costs for workers saving for retirement.

The Office of Fair Trading said hundreds of thousands of employees putting money into pension plans taken out before 2001 were paying as much as 26 per cent more in hidden fees and charges.

The OFT estimates that 1.4 million members of pension schemes set up before 2001 will pay an extra £1.9bn in punitive charges before they retire.

The regulator added that providers were fleecing members of 10,000 pension schemes by increasing management fees on employees' savings pots when they move jobs and become "deferred members". This is because those who leave the scheme pay higher charges to subsidise the cost for current employees, know as active member discounts.

OFT chief Clive Maxwell said these deferred charges should be banned - or millions would lose out as the Government's auto-enrolment scheme kicks in over the coming years and more workers are signed up to pension plans.

He called for an immediate review of the pensions market and said he had specific concerns about schemes holding £40 billion-worth of savings - 14 per cent of the industry.

But experts criticised the OFT for going nowhere near far enough to push through change.

The pensions trade body - the Association of British Insurers - will lead an audit on behalf of the OFT.

The OFT added that it had no idea when changes would be implemented, and ruled out a cap on wider management fees, arguing that setting a 1 per cent threshold for all schemes may encourage firms to move up to this level.

As the OFT stopped short of a immediate cap on excessive charges and it now falls to the Government to decide whether a cap should be introduced.

One expert said: "It's limp to say the least. Putting the ABI in this role is like putting a fox in charge of the chicken coop."

The investigation found around £30bn of savings in older schemes not "delivering value for money" as well as another £10bn in smaller schemes overseen by trustees with "low levels of capability".

The OFT has an agreement from the ABI which represents the pensions industry, to audit older schemes to establish why charges are high. It has also asked the Department of Work and Pensions to consider whether the Pensions Regulator needs new enforcement powers to tackle the problem.

Mr Maxwell said: "We have found problems in relying on competition to drive value for money for savers in this market.

"We've therefore worked closely with the Government, regulators and industry to agree a set of measures that we believe are an important step in helping to ensure that savers get better outcomes.

"It is important, particularly given that automatic enrolment is already under way, that these measures are implemented rapidly."

The Telegraph understands that the Government will next week launch a consultation based on the findings in the OFT report. This is expected to include a proposal to cap wider charges and ban the higher fees paid by deferred members. Earlier this week Steve Webb said: “A cap would give absolute confidence.”

The Government is hoping to encourage millions more people to take out workplace pensions over the coming years to help plug a huge gap in Britain's pension savings. Millions face a retirement in poverty unless current trends are altered.

So far one million workers have signed up for so-called “auto-enrolment” pensions, where staff have to opt out of putting money aside for their retirement, since the Government launched the initiative last year.

The size of the problem and next steps

Previous research by the Telegraph found that hidden charges and fees meant British workers’ pension savings could be 50 per cent smaller than those of workers on the Continent who have saved the same amounts. Some fees can swallow three-quarters of all the money workers save.

The focus will now be on the industry to police the older, high-charging funds.

Otto Thoresen, director general of the ABI, said: "The schemes principally identified by the OFT as potentially having charges not representing good value for money account for around 10% of the nearly £300 billion assets managed by the industry, including closed schemes and schemes that will not be used for automatic enrolment.

"But we agree with the OFT that it is important to review charges to ensure they represent good value for money for today's employers and savers. "Pension providers have agreed to an audit of all legacy and higher charging schemes to ensure any problems can be sorted out."

Mr Thoresen said pension charges have already been driven down over the past decade due to factors such as the impact of new technology.

He said: "Pension charges are lower, more transparent and more understandable than ever before.

"This is good news for people saving into a pension. But it is important to remember that the level of contribution and how long someone works remain the most important factors in determining an individual's overall retirement income."

The OFT has also said that committees should be set up by next year to oversee workplace pension schemes, chaired independently and provide annual reports to pension company boards and also a statement to the Pensions Regulator.

Gregg McClymont, shadow pensions minister, said: “The Government must act on these recommendations. Labour has already tabled amendments to the Pensions Bill which would allow reforms of the market on costs and charges, governance and scale to make sure pensions are good value.

“David Cameron’s failure to act shows how out of touch he and his Government are and they must urgently rethink their rejection of those amendments.”